Chinese Tech Stock Weekly Update

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• Shanda Interactive Entertainment Ltd. (NASDAQ:SNDA), one of the largest online games operators in China, posted second-quarter net income of 133.6 million yuan (US$16.7 million), compared to the year-ago quarter, it earned 223 million yuan (US$28 million). The company said its revenue reported a 23 percent decline to 405.7 million yuan (US$51 million) from the previous year as Shanda adjusts to a new business model introduced late last year that offers basic play on some of its games for free and generates cash from selling extras like weapons and accessories. A top company official said that some investors are worried about the sustainability of the company's altered business model, which allows customers to use role-playing video games for free. By offering the games without charge the company said it is cutting down on much illegal hacking of the company's software. The revenue beat the average analyst estimate of US$43.4 million as compiled by Reuters Estimates, with Shanda saying gamers were increasingly adopting the new model.

• NetEase.com (NASDAQ:NTES), China's biggest online-game company, reported a 29 percent rise in its secondquarter profits to 314.1 million yuan (US$39 million). The company said its sales rose by 38 percent to 575.3 million yuan (US$72.1 million) from 416.9 million yuan (US$52.2 million). NetEase said it expected sales in the third quarter to post up to 29.6 percent growth to between US$73.2 million and US$75 million, up from US$57.8 million a year earlier. That compares with expectations of US$72.4 million, according to the median estimate of eight analysts interviewed by Thomson Financial. In the second quarter, NetEase said its online game sales went up by 41 percent to 486 million yuan (US$61 million), from 343.7 million yuan (US$43 million) a year earlier. Revenue from online advertising increased 29 percent to 68.8 million yuan (US$8.6 million) from 53.4 million yuan (US$6.6 million). Sales of ring tones, games, and other products for cellphone users went up by 4.1 percent to 20.5 million yuan (US$2.5 million) from 19.7 million yuan (US$2.4 million). After two years, the company said it is introducing two new games – Big Tang and Under the Heavens. Industry observers said that the company is expecting Under the Heavens to become a blockbuster.

• Guangzhou announced that it will soon end a two-year moratorium on licensing new Internet cafes, a move that is expected to double the number of legal internet bars in the city by next year. The decision to stop processing applications was prompted by an arson attack on an illegal Beijing Internet cafe in 2002, which saw 25 people killed. A top official of Guangzhou's Bureau of Culture was quoted as saying the city planned to authorize 520 new internet bars before next year, of which 364 would be individually operated and 156 part of national or provincial chains. Industry sources said the new quotas would increase the number of legal Internet cafes in the city to 1,212 from the current 692. Underground operators have filled the shortage of legal facilities. The municipal government said the city had more than 1,800 illegal cyber bars by 2003.

• Under a business alliance considered to be the most comprehensive ever joined in by Google (NASDAQ:GOOG), its technology will be seen as providing power for China.com’s (NASDAQ:CHINA) online search engine. Under the agreement, the technology will be used for China.com searches for online content in English and traditional Chinese. China.com claims it was one of China’s first Internet portals. Since its founding, the firm said it had launched a group of websites designed to help global businesses access increasingly affluent consumers in China. Under the partnership, China.com and Google will cooperate regarding branding, content and advertising, according to the companies.

Mobile/Wireless

• InterVideo (OTC:IVII) has announced that China MobileSoft has selected InterVideo's iMobi video and audio codec technologies for its upcoming Linux smart phone embedded software designs. By incorporating InterVideo's iMobi multimedia codec technologies, China MobileSoft will provide OEMs and ODMs with a complete solution for enhancing their smart phones with robust entertainment features. InterVideo's patented video codec algorithm allows consumers to record and playback high quality, jitter-free video clips with ease. With InterVideo's next-generation technology for 3G cell phones and CMS's smart phone software, consumers will have outstanding video capabilities on their mobile phones. According to International Data Corporation, China is the largest mobile phone market in the world.

• Hurray! Holding Co., Ltd. (HRAY), a leader in wireless music distribution and wireless value-added services, as well as artist development, music production, and wireless value-added services management software in China, reported as part of its unaudited financial results for the second quarter ended June 30, 2006, total revenues of US$18.3 million. The total revenues represent growth of 10.2 percent quarter over quarter and 22.1 percent year over year, exceeding previous guidance of US$16.5 million to US$17.5 million. The company said its wireless value-added services revenues posted a growth of 14.5 percent quarter over quarter and growth of 23.7 percent year-over-year to US$16.6 million. For its software and system integration services revenues, it reported US$0.4 million, a decline of 43.0 percent quarter over quarter and 77.1 percent year over year. 2.5G service revenues were US$8.1 million for the second quarter of 2006, representing growth of 2.8 percent as compared with US$$7.9 million for the previous quarter. MMS, which was fully commercially launched in the second quarter of 2005, recorded revenues of US$1.3 million for the second quarter 2006, a decline of 9.5 percent as compared with US$1.4 million in the previous quarter. Recorded music revenues, which represent revenues of Hurray! Freeland Music and Huayi Brothers Music, were US$1.4 million, a decrease of 9 percent compared with US$1.5 million in the previous quarter. The company said its net income was US$1.7 million, representing a growth of 84.9 percent quarter over quarter and a decline of 66 percent year over year.

• China Mobile (NYSE:CHL) reported a 23.6 percent rise in its second-quarter net profit to 15.8 billion yuan (US$2 billion) from 12.7 billion yuan (US$1.5 billion). It reported a 20.6 percent turnover increase to 71.9 billion yuan (US$9 billion). The results were in line with expectations, with the company ascribing the performance to customer growth and improved mobile data business. The company said its data business consisting of ring tones and short video clips registered a huge increase of 37.1 percent to 30.9 billion yuan (US$3.8 billion) from 22.5 billion yuan (US$2.8 billion). The figure stands for about 22.6 percent of total revenues compared with 19.7 percent previously. China Mobile said it listed 273.7 million customers on its 2G network compared with 223.7 million a year earlier. The company’s first-half net income reported a 25.5 percent increase to 30.1 billion yuan (US$3.7 billion) from 24 billion yuan (US$3 billion).

• KongZhong's (KONG) reported a 64 percent year-over-year and 8 percent increase sequentially of its total revenues in the second quarter to US$30 million. The company said its revenue from 2.5G services registered a 2 percent growth from the same period in 2005 and a 23 percent decline from the first quarter of 2006 to US$13.7 million. Its WAP revenue in the second quarter of 2006 went down by 32 percent from the same quarter of 2005 and by 25 percent from the first quarter of 2006 to US$6.6 million. The company posted a 97 percent growth from the same period of 2005 and a decline of 18 percent from the first quarter of 2006 in its MMS revenue of US$6.5 million for the second quarter of 2006. Its revenue from 2G services, including short messaging service [SMS], interactive voice response [IVR], and color ring back tone [CRBT], posted a growth of 238 percent year-overyear and 63 percent quarter-over-quarter to US$16.2 million in the second quarter of 2006. The company ascribed the growth in 2G revenues to the acquisition of Sharp Edge completed in the first quarter. It reported total operating expenses in the second quarter of 2006 hitting US$10.1 million, a growth of 82 percent year over year and 9 percent quarter over quarter. As of June 30, 2006, KongZhong said it had US$122.2 million in cash and cash equivalents. KongZhong is a leading provider of advanced second generation (2.5G) wireless interactive entertainment, media, and community services, in terms of revenue, to customers of China Mobile Communications Corporation (China Mobile), which has the largest mobile subscriber base in the world.

• China Mobility Solutions (CHMS) disclosed that it has joined the short messaging service [SMS] banking market in the mainland, after acquiring control of Beijing Topbiz Technology Development. The Vancouver-based software company operates in the mainland through subsidiary Beijing Quicknet Telecommunications Corp. Under the deal, China Mobility said it has agreed to buy about 60 percent of Topbiz with US$3.7 million in cash and 8 million new shares at 46 U.S. cents each. The current development indicates that mainland banks are looking into the prospects of offering SMS and other value-added services as a response to competition from overseas rivals, which will be allowed to enter the market under World Trade Organization agreements at the end of this year. SMS banking enables users to check account information or access banking services at any time and place. Topbiz, which posted US$785,000 in net profit last year on revenues of US$2.7 million, develops and provides custom SMS-based banking systems that are carrier-independent and compatible with all mobile phones configured for Chinese text messages. China Mobility pioneered the use of SMS as an advertising medium in the mainland. The company provides mobile marketing, branding and business solutions to domestic small and medium-sized enterprises. It posted a 27 percent rise in its revenues for the first half of the year, to US$2.9 million from US$2.2 million in the same period last year.

Media/Entertainment and Gaming

• World of Warcraft has earned US$32 million for The9 (NASDAQ:NCTY), the game's licensee in China, during the past three months alone. There is however, some concern arising because of the news that Warcraft developer Blizzard Entertainment is apparently delaying an expansion pack agreement, while The9 upgrades servers to improve performance and user experience. About 99 percent of The9’s revenue of US$32.2 million revenue for the second quarter came from World of Warcraft, which has more than five million registered players in China. Analysts noted that the company has been very successful in its efforts to license new games that are likely to be popular. This makes The9's current reliance on Warcraft less worrying they say, despite the firm's continuing failure to finalize a deal with U.S.-based Blizzard for the Burning Crusade expansion pack, according to observers.

• CDC Games, a subsidiary of CDC Corporation's China.com Inc. (CHINA), announced the acquisition of the license to the Japanese online game Stone Age 2 from Japan's DigiPark. The game, which is expected to be launched at the beginning of 2007, will be free to play with the players paying for the virtual merchandise. A top officer of China.com said the firm is looking to the success of the new game, which is set in the prehistoric era. Stone Age 2 is built around a game that requires players to cooperate as they build villages, capture and raise dinosaurs and search for treasure.

• PacificNet's subsidiary, PacificNet Games Limited (PacGames) announced its acquisition of Able Entertainment Technology Limited, a Macau-based leading electronic gaming technology provider. Under the agreement, Able Entertainment Technology Ltd. will aim to raise an audited annual profit of US$1.6 million and will provide for an adjustment to the purchase price if it does not achieve an annual net profit of US$1.6 million during the first 12-month period and US$3 million during the second 12-month period. As a result of the acquisition of Able Entertainment Technology Limited, PacificNet Games Limited is expected to become a leading provider of Chinese electronic gaming machines, gaming technology solutions and gaming related maintenance, IT, and distribution services for the leading hotel and casino operators based in the Macau Special Administrative Region of China and other Asian gaming markets.

• China Finance Online (NASDAQ:JRJC) disclosed that it has entered into definitive agreements for the acquisition of Stockstar.com. The agreements see China Finance Online and an affiliate paying US$6.5 million and 12 million yuan (US$1.5 million), respectively, in exchange for an aggregate consideration of about US$8 million, bringing in 100 percent of the equity of Stockstar.com. A top official of Stockstar described China Finance Online as having formed solid brand awareness in the marketplace and stands for “an exceptional platform” that can be used for future growth. Stockstar.com is one of the leading finance and securities web sites in China.

Hardware

• Lenovo (OTCPK:LNVGY) announced that David Miller, former president of Dell China, had joined as president of its Asia Pacific operations. Miller, who is also senior vice-president of Lenovo, will be based in Singapore. In another development, Sotaro Amanoas, formerly corporate director of Dell's (NASDAQ:DELL) home and business sales division in Japan, has taken the post of president of Lenovo Japan. Amanoas was formerly corporate director of Dell's home and business sales division in Japan and managing director of Dell Miyazaki. Dell also announced its plan to boost its sales unit in China even as it disclosed its aim to form ties with software firms.

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